On 23 February, Unisplendour Corporation announced its decision to terminate the acquisition of Western Digital, a US storage giant, due to concerns regarding the review process of the Committee on Foreign Investment in the United States (CFIUS). Last July, Tsinghua Unigroup had offered US$23 billion to acquire Micron Technology, a US chipmaker, but the proposal was also put off due to CFIUS concerns.
Other Chinese M&A initiatives that have recently failed as a result of CFIUS reviews include Fairchild Semiconductor’s rejection of China Resources’ acquisition offer and Philip’s termination of the sale of its lighting business to GSR Ventures. CFIUS reviews are now considered one of the main legal hurdles for Chinese enterprises contemplating investment in the US.
As an inter-agency US government authority, the CFIUS is responsible for reviewing the national security implications of foreign investment in the US. Headed by the Department of the Treasury, other members of the CFIUS include the departments of justice, homeland security, commerce, defence, state, and energy. According to the 2014 annual report recently published by the CFIUS, 627 foreign investment projects were submitted for CFIUS review between 2009 and 2014, covering a wide variety of industries including computer technologies, electronics, publications, technology services, infrastructure, mining and transportation.
A total of 68 Chinese-invested projects underwent CFIUS reviews from 2012-2014, the highest number for any country. These reviews can create difficulties for investors in a number of ways, such as causing: the abandonment of a project over concerns about its ability to pass a CFIUS review (UNIS’ proposed acquisition of Micron Technology); the termination of an acquisition in the middle of the review process (the Philips-GSR Ventures deal); and the suspension of a pending acquisition due to the CFIUS’ review request after the companies had elected not to submit a voluntary CFIUS filing (Sany Heavy Industry’s acquisition of a wind power plant from Ralls Wind Farm). Below is a brief introduction to the CFIUS review process.
CFIUS procedures primarily comprise five steps:
The CFIUS primarily operates based on voluntary filings, and companies involved in an acquisition determine whether to submit a filing. However, the CFIUS has broad discretion to review any project that might raise national security concerns, regardless of the project value, and even if the project has been completed.
So foregoing filing runs the risk that a completed project is later rejected after a CFIUS-initiated review, resulting in significant losses to all parties. Therefore, prudent investors generally seek the advice of legal counsel prior to any investment to determine the risks involved, and whether a filing should be made for a particular project.
Factors influencing whether an investor will file include:
- Size. Larger-scale projects have greater visibility and so run higher risks of review. In addition, the costs of unwinding after closing generally increase with the scale of the project;
- Industry. When investing in sensitive industries, locations or assets, voluntary filing is generally recommended;
- Investors. Investors who have other investments in the US and hope to maintain good relationships with related government authorities, or entities that may incur stricter scrutiny (state-owned enterprises), often choose to file voluntarily.
The initial CFIUS review is usually completed within 30 days of filing. During this process, CFIUS member agencies may request additional information and further explanations from the parties involved. The review primarily evaluates two factors: (1) whether the US assets involved expose risks to national security; and (2) whether the foreign investor poses any risks, including whether the investor is controlled by a foreign government, comes from a dangerous country, or has a previous record of threatening US national security.
After the 30-day review period, the CFIUS may initiate an investigation for up to 45 days to further evaluate certain aspects of a project. The CFIUS can also in rare cases present the project to the US president, who usually determines whether to approve or reject a project within 15 days of completion of the CFIUS investigation.
The CFIUS has the right to set conditions on the implementation of projects that are deemed to present national security risks. Common conditions include:
- Ensuring that only permitted personnel will have access to certain information and technology;
- Setting up a security committee inside the company, or appointing a person approved by the US government as the person in charge of security and overseeing the company’s security compliance; and
- Formulating special rules for the execution of contracts signed with the US government and for handling sensitive information.
The CFIUS will usually formulate detailed supervising mechanisms for the implementation of remedial measures including periodical reporting requirements, on-site inspections, third-party audits, and prescribed punishments for violations. As a result, investors usually voluntarily divest sensitive businesses of the target entity, while maintaining the operations of non-sensitive businesses after an acquisition, in order to successfully pass the review and avoid complicated compliance formalities.
If the CFIUS or the US president determines that the project does not present a risk to US national security, and decides not to impose any restrictions on the project, a project will be approved and allowed to proceed.
As a result of the growth in size of many projects, and expansion into more industries in recent years, an increasing number of proposed Chinese investments in the US have become subject to CFIUS reviews. A failed review not only affects the project in question, but may also influence prospects for an investor’s future investments and even other unrelated Chinese investments for a period of time. Therefore, investors should take a cautious approach with CFIUS reviews, making sure to co-operate with professional advisers in advance to formulate comprehensive plans to successfully pass the review.
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